Raising money for your new startup isn’t as difficult as you may think.
However getting the right source of funding is slightly more complex. Each source of capital has its own unique advantages and disadvantages.
Here are 8 of the most reliable sources when it comes to raising money for your startup.
8 Ways To Raise Capital For Your Startup
1 – Crowd funding
While crowdfunding is still in its infancy as a means of raising money for your startup its popularity is rapidly increasing. Crowd funding takes it name from the fact that your project is funded by the public using their own personal funds. To start with, you propose the idea that you wish to see funded. People can then choose how much or how little they want to give you. Most crowdfunding sites currently use a reward base model where people who invest in a new business venture are given some form of reward such as the product that is going to be produced. However changes to US law will soon allow equity based crowdfunding.
Some of the best crowdfunding websites for small businesses include Kickstarter, Indiegogo, and Fundable.
2 – Angel Investing
After entrepreneurs have made their fortune many of them look to invest their funds back into startup businesses. These are known as angel investors. Some of the worlds largest businesses including Google, Facebook, Skype and Twitter have received angel investing.
The benefits of receiving angel investment go beyond the purely financial. The advice and connections that a good angel investor can offer can be equally as valuable. Angel investors are willing to take on the risk of a brand new startup. There are a number of angel investing networks which connect entrepreneurs and investors. Some of the biggest networks include Golden Seeds, Tech Coast Angels and Investors Circle.
3 – Family and Friends
Your family and friends want to see you succeed and may even want a stake in your potential goldmine for themselves. However using family and friends as a source of raising money can be problematic. It can create a strain that can ruin personal relationships. It is also worth remembering that over 50% of small businesses fail in their first five years often because of factors completely outside of the control of the owners. Make sure that you are not borrowing money that they can’t afford to lose. Put any lending agreement in writing with the terms clearly laid out even if it is a “friendly” loan.
A number of successful businesses have started out with a loan from friends and family, so don’t shoot this idea down, just be mindful about the pitfalls and burdens that may come about in turbulent times. The risk is high but so is the reward when you are able to grow not only your own wealth but friends and families along the way.
4 – Credit Cards
Credit cards should be viewed as a temporary measure between getting your business started and obtaining other financing such as a bank loan. Given the hefty 10 – 20% plus interest rates on many credit cards they are generally not a good source of loan term capital. That said credit cards have been used by many entrepreneurs when their was no other options available. In the mid 1990s the founders of Google initially funded the company using credit cards. While the founders maxed out their credit cards they used the funds wisely, purchasing second-hand computers instead of new ones and open source software instead of off the shelf.
5 – Bank Financing
One of the most common ways that people raise capital for their small business is through a bank loan. Your banker may request that you have your loan guaranteed by the Small Business Association before approval. The SBA is a government agency who will guarantee up to 80% of the value of the loan for applicants which meet their criteria. Alternatively you may be able to offer some other form of security such as your home to get your loan approved.
6 – Second Mortgage
Second mortgages are also referred to as home equity lines of credit. These loans tap into the locked up equity you may have in your home. To calculate how much you may be able to borrow for a second mortgage take the value of your home and deduct the value of any outstanding mortgage. Be aware some lenders may only lend only up to 70 – 80% of the fair value of the home. One of the biggest advantages of using a second mortgage is that the interest rate tends to be lower than with others form of financing. This is because the bank knows it can always recover the value of the loan by foreclosing on your property if you are not able to meet your interest payments.
7 – Venture Capital
Venture capitalists aim to invest in early stage businesses with high growth potential. Traditionally venture capitalists received equity in the business in exchange for funding it. However these days they typically demand a mixture of equity and debt financing.
The venture capital business is based on the idea of a few big wins making up for a lot of poor performers. In fact approximately 3 out of 4 businesses which receive venture capital fail. Because of this venture capitalists look for businesses which have a lot of growth potential. If the market for your business is more modest you may need to look elsewhere for funding.
8 – Business Partner
You might not have the money to get your business started but maybe you know someone who does. Of the Inc top 500 businesses, 28% received seed funding from a co-founder.
When selecting a partner for your business you need to make sure that their own goals for the business are aligned with yours. As a business partner they will have control over the direction of the business. It is also a good idea to have a buy out agreement in place in case of a breakdown in the business relationship. This should stipulate that the other partner must agree to a proposed buyout within a set time frame or buyout the other partner themselves.
Finally it is worthwhile looking at the lesson of Facebook. CEO and founder Mark Zuckerberg had seen how earlier dot com companies had been willing to give away almost all of their equity to venture capitalists in order to get funded. He wasn’t going to make the same mistake and never gave up equity lightly. His 28.1% stake is now worth $14.9 billion. Be careful to negotiate your own financing terms with equal tenacity even when all you have is a vision for the future. The difference may one day be worth millions.
6 Guy Kawasaki Lessons About Pitching Your Startup To An Investor
Guy Kawasaki is a Silicon Valley venture capitalist, bestselling author, and Apple Fellow. He was one of the Apple employees originally responsible for marketing the Macintosh in 1984.
“You say: “I have lots of great ideas, but I have trouble figuring out which one to try. Let me tell you about a couple.” Investor thinks: “I want to know which idea you’re going to kill yourself trying to make successful, not which ideas have crossed your idle mind.”” – Guy Kawasaki
“Here’s what you should say [to investor]: “This is what my company does…” It’s that simple. What you’re trying to do is get potential investors to fantasize about how your product or service will make a boatload of money. They can’t fantasize if they don’t know what you do.” - Guy Kawasaki
“You say: “I love to think of new ways to solve problems.” Investor thinks: “Is this a high-school science fair?””- Guy Kawasaki
“You say: “My goal is to build a world-class company.” Investor thinks: “How about you ship and sell the first copy before we talk about world-class anything?”” - Guy Kawasaki
“You say: “I don’t know much about your firm, but I thought I’d contact you anyway.” Investor thinks: “You’re a lazy idiot–why are you wasting my time?”” - Guy Kawasaki
“You say: “The last time I contacted you, I…” Investor thinks: “I’m going to fire my secretary for putting this clown on my calendar again.”” - Guy Kawasaki
Article By: Jonathan Savage & Joel Brown | Addicted2Success.com